Rent receipts are not enough to prove HRA claim: Here're the dos and don'ts

If you are paying rent to a close relative, have a rental agreement and pay them through banking channels

Be extra careful when you submit housing rent allowance (HRA) receipts to your employer if you pay rent to a close relative like parents, sibling or spouse. Make sure that you have documents beyond the rent receipt to substantiate that it’s an authentic payment and not done merely to save tax.

Last year Income Tax Appellate Tribunal (ITAT), Mumbai, rejected an HRA claim of a taxpayer as she could not produce documents to substantiate that payment of rent has actually happened. The assessee claimed Rs 252,000 HRA stating that she gives rent to her mother and only produced rent receipts. When supporting documents such as rent agreement and bank statement were sought, she could not provide any and lost the case.

Just because you are paying rent to a close relative, don't be lax about the documentation. “Anyone can get a similar income tax notice asking to produce documents to prove that their submissions are genuine. Every year, the authorities come up with certain criteria based on which they analyse the returns using Computer Assisted Scrutiny Selection,” says Chetan Chandak, head – tax research at H&R Block India. The criteria can be, say, shortlist all HRAs above a certain limit for scrutiny, explains Chandak. Then, there is also manual scrutiny done by tax authorities. 

An individual needs to satisfy just two conditions when claiming HRA. One, he is occupying the property. Two, the property owner receives the rent. “The best document to start with, therefore, is to have a valid rent agreement between you and your relative. It should carry details of who will bear property related costs such as maintenance, property tax and utility bills,” says Naveen Wadhwa, general manager, Taxmann.com. The landlord (your close relative) can also inform the society about the arrangement. 

To keep a trail of rent payment, use a banking channel to the money. If you pay in cash, ensure that the ATM withdrawals show that you have withdrawn money proportionate to the rent or more. Also, the money should be paid to the owner of the property and not to his spouse. In the Mumbai ITAT case mentioned above, the income tax department even checked details such as who pays the electricity and water bills. The assessing officer would not usually ask for such information. But as the taxpayer wasn’t able to establish her claim, the officer further probed.

Another way to substantiate that your close relative, the property owner, receives the rent is by ensuring he or she filed returns and declares the rent in it. “If you pay rent to your parents, whose income is not taxable, it would still be a good idea that they file returns and declare the rental income,” says Wadhwa. They also get 30 per cent deduction towards the maintenance of the property. Exaggerating the rent can also cause problems. The rent should reflect the ongoing rates in the area.

This year, if you are paying over Rs 100,000 annual rent, then you also need to mention the PAN of the landlord. Most companies don’t allow to claim HRA if you fail to submit PAN details along with the HRA. If you cannot back up your claims with proper documents, it’s best you forgo the claim. In this case, the money will be added to your income and taxed based on your tax slab. 

Follow the rules

 Have a registered rent agreement

 Make payments through banking channels

 Mention PAN details if annual rent is over Rs 1 lakh

 Ensure that relatives file returns and disclose rent received

 Make payment to the person who holds the title for the property